Sales or consumption taxes have long served as sources of revenue for governmental entities at all levels. Levied at the time of purchase, sales or consumption tax is imposed on myriad goods and services deemed taxable by federal/national, state/provincial and local governments. In the United States, for example, forty-five states presently impose state sales tax on goods and services sold in those states. Local governments within those and other states may assess similar taxes, and the federal government may impose luxury or other sales taxes or levies on certain goods or services. Other countries or regions may impose similar taxes commonly known as value added taxes or VATs.
Because of the virtual character of the Internet, online sales transactions have thus far gone essentially untaxed. Rising Internet sales activities present tax issues of increasing significance. The growth of the remote selling component of the Internet (i.e., electronic commerce or e-commerce) has been fueled by the many unique advantages the Internet offers consumers versus traditional means of commerce. These include greater purchasing convenience, a much larger variety of available goods and services, increased product and service information, and, in many instances, lower prices.
E-commerce growth projections are well documented. For example, Forrester Research, Inc. of Cambridge, Mass., has estimated that global business-to-business and business-to-consumer commerce over the Internet may reach as high as 6.8 trillion by 2004. Even a much more conservative growth scenario offered by Karl Freiden in his 2000 book entitled Cybertaxation: The Taxation of E-Commerce (“Freiden”) has estimated that in the United States alone, sales to both businesses and consumers via the Internet are projected to increase from $50 billion in 1998 to $1.5 trillion (of an estimated global total of almost $1.8 trillion) by 2003.
E-commerce poses a considerable threat to local, regional, and state taxation revenues. The meteoric rise of e-commerce and web retailing is further reinforcing the trend toward direct marketing and remote selling that has been established by mail order shopping and television home-shopping channels, such as the Home Shopping Network and QVC. Typically, an online transaction is completed once a credit card company authorizes a customer's issuing bank to send payment to a merchant's accepting bank. For a merchant with an online presence and that sells goods or services to customers that are located in the states where the merchant maintains a physical presence, the merchant is responsible for collecting the appropriate sales tax and for full timely remittance to the appropriate taxing jurisdiction. However, many web merchants do not maintain costly “brick and mortar” retail outlets. Rather, their business model supports a remote seller concept that is almost identical to a mail-order business model. A remote seller is an entity that sells goods or services in a jurisdiction in which it does not have a physical presence or nexus. As a remote seller, these entities are not required to collect and remit sales taxes to the jurisdictions in which their products or services are delivered. In fact, a presently existing federal moratorium on taxation of Internet sales transactions and a U.S. Supreme Court decision, Quill Corp. v. South Dakota, 504 U.S. 298 (1992), expressly relieve a remote seller from the responsibility of collecting sales tax unless it maintains a physical presence in a state in which it conducts sales. The premise of the Quill ruling was that it is too burdensome for remote sellers to collect taxes levied in states where they do not have nexus.
Freiden has estimated that state and local taxes account for over $700 billion in revenues in the United States, or about 45% of all tax dollars raised in the country. This tax revenue stream is used to support basic public services, including state and local fire and police operations, educational facilities, and road/bridge construction and other infrastructure projects. Since the majority of web retailers sell remotely and thus do not collect sales tax, the ability of state and local taxing jurisdictions to maintain their tax revenue bases and public services offerings will increasingly suffer. Indeed, in reliance upon statements from the Center on Budget and Policy Priorities, Freiden estimates that, by 2003, tax revenue losses attributable to remote mail-order sales will be $5 billion and remote Internet sales will be $10 billion.
Although remote electronic transactions conducted over the Internet and the like are rapidly increasing in number, conventional point of sale transactions presently constitute the majority of automated wholesale and retail sales presently conducted in the United States and elsewhere. In a typical point of sale transaction, an object bearing a uniform commodities code such as a barcode on its exterior or its packaging is scanned by a code reader to register the transaction. In the process of scanning, the code reader normally retrieves transactional information associated with the goods or services being purchased such as a description of the goods or services, the cost of the goods or services, the presently known tax status of the goods or services (e.g., taxable, non-taxable, tax-exempt) in the taxing jurisdiction in which the goods or services are sold, and the presently known tax rate associated with the goods or services, if taxable, in the taxing jurisdiction in which the goods or services are sold. Records of these transactions may be stored locally or at a central location. The wholesaler or retailer periodically forwards the sales taxes collected thereon to the appropriate state and/or local taxing authorities.
For companies operating in relatively localized markets, the task of maintaining the accuracy and integrity of its coded tax information with reasonable timeliness may be quite manageable. However, for companies that sell hundreds or thousands of coded products or services and conduct business nationally or globally in many taxing jurisdictions, maintaining current and reliable tax assessment information may be daunting. Moreover, in the absence of up-to-date sales tax information, such companies may expose themselves to considerable tax liability for undertaxing or failing to tax its taxable goods and services. Conversely, if a company overtaxes its customers on taxable transactions or, alternatively, charges tax on non-taxable or tax-exempt transactions, the attendant inflated prices of its goods or services may deleteriously impact the company's ability to compete in the marketplace and, possibly, expose the company to legal liability.
Several automated systems are known that address point of sale sales tax issues such as monitoring, assessment and collection.
For example, U.S. Pat. Nos. 5,644,724, 5,774,872, 5,799,283 and 5,875,433 disclose automatic sales tax collection and remittance systems.
U.S. Pat. No. 5,924,077 describes an automated system for monitoring point of sale business information data including whether sales tax is or is not charged at the point of sale.
U.S. Pat. No. 5,335,169 provides an automated system whereby the system user may track multiple types of sales tax assessments for different taxing authorities.
And, U.S. Pat. No. 5,819,249 discloses a system which is also adaptable to compute, inter alia, sales or use tax status for transactions in multiple taxing jurisdictions. The system employs an interactive question and answer type program whereby the user of the system is prompted by the program to respond to a series of inquiries whereby the nature of the user's responses determines the tax status of a transaction in a desired jurisdiction.
The present inventors are aware of no independent third party services which employ an adaptive system including a master tax assessment database compiled from the contents of a plurality of client databases, whereby the master database serves as a repository for the tax status and tax rate information for the clients' collective inventories of goods and services and against which any individual client's sales tax database may be quickly compared, modified and saved upon request. The present inventors believe that the systems described in the aforementioned U.S. patents would appear to rely on tax status databases compiled by personnel employed or contracted by the individual systems users from sundry sources such as state and local tax authorities and professional journals to create and maintain internal tax status databases unique to each user. To be even modestly reliable, the content of the databases cannot be static and must be periodically updated. However, the speed and frequency at which such updates are performed may be less than desirable. This is because considerable time and research may be required for employee or contractor tax specialists, even if working in teams, to compile all of the latest product information and tax status and rate information that may be applicable to all of the many jurisdictions in which a company, especially a large company, may conduct business. It will be appreciated that prohibitive budgetary and time constraints would effectively prevent essentially real-time maintenance of such databases. Consequently, it is likely that, if placed into actual service, the systems disclosed in the patents frequently would perform their tax status monitoring functions in reliance upon outdated information which might expose the users of the systems to considerable economic harm and, possibly, tax or other legal liabilities.
Additionally, there are no systems presently known to the inventors for accepting online sales tax exemption certificates, for providing real-time reports to state and local taxing jurisdictions and retailers, and for providing a back office system that remits the correct sales tax to the proper taxing authority.
The United States Constitution generally respects state sovereignty with respect to a state's ability to impose taxes on goods and services sold within its borders. Accordingly, state legislatures commonly impose sales tax on certain goods and services and permit certain uses of goods and services to be exempted from sales tax. Whether a commodity is exempted from sales tax is based on the how the commodity is used by the purchaser. For example, the Commonwealth of Pennsylvania generally imposes sales tax on computers. However, computers can be bought exempt from sales tax if they are to be used in research and development, manufacturing, or by charitable institutions or political subdivisions (the latter two are exempted in all states). Political, social, and industrial lobbying groups, as well as individual companies, routinely lobby state legislatures for exemptions that create financial incentives and tax advantages for their particular concerns. Conversely, legislatures have proactively sought to create benefits for taxpayers in their jurisdictions by providing tax exemptions and exclusions and other financial incentives to targeted industries, sectors, or companies to stimulate economic activity.
Political entities, charitable institutions, and businesses procuring goods and services for exempt purposes commonly provide exemption certificates to the vendors of the goods and services which sets forth the exempt manner in which the good or service will be used. By accepting this exemption certificate, a vendor safeguards itself from tax audit liability for granting the exemption from the state or local jurisdiction in which the vendor operates.
Businesses or institutions that utilize sales tax exemption certificates must apply and register in each state in which they intend on using the certificates. Once an application is received, a state issues an exclusive sales tax exemption number for the particular taxpayer. Large nationwide businesses and each of their separate subsidiaries are typically issued multiple exemption numbers for each state in which they conduct business.
Dell Computer Corporation of Round Rock, Tex., one of the largest web retailers, utilizes a traditional method when allowing entities to purchase computers and related computer equipment under a tax exemption. As used herein, the term “web retailer” shall be construed to mean any merchant who conducts electronic sales online via the Internet or other interactive broadband network, and shall include any merchant who conducts either retail or wholesale sales. Dell's traditional exemption choice model requires that the customer conduct a Dell service representative by telephone and verbally provide exemption status information in order to process the transaction. However, the consumer must first call a Dell service representative to establish an account as well as provide an exemption number to Dell. This is the typical model followed by web retailers whose primary target market is business, political, or charitable entities for enabling their customers to purchase goods and services without paying sales tax.
The following exemplifies the inefficiencies of the traditional method for purchasing tax exempt merchandise online. First assume that a New Jersey subsidiary of General Electric Company (GE) of Fairfield, Conn. purchases computers through Dell Corporation's website. GE will use these computers for research and development for their plant operations in New Jersey. GE personnel are aware that computers used for research and development in New Jersey can be purchased exempt from sales tax by using a standard New Jersey ST-5 research and development exemption certificate. Dell requires that customers such as GE, must first call a Dell customer representative and provide their exemption information. Dell then stores this information for their own records as well as for state and local taxing authorities.
When Dell Corporation files a sales tax return in New Jersey it is required to provide the state with information regarding its sales in New Jersey as well as exemption information associated with those sales. GE's New Jersey subsidiary is also required by New Jersey law to maintain records of purchases made using exemption certificates. These records of exemption purchases safeguard both Dell and GE from audit liability.
At present, however, there is no real-time interactive means by which sales tax exemptions are processed on sellers' websites or on their customers' web browsers for goods and services sold online.
Moreover, in the United States, the imposition of sales tax is based on the location where a particular product or service is delivered to a consumer's possession. Thus, sellers of goods and services with a nexus or physical presence in the state of delivery, such as telecommunications companies, must apply the correct tax rate when billing their customers. In many situations, applying the correct rate can be a daunting task since over 10,000 state and local jurisdictions in the United States impose their own rates. This is complicated by the fact it is often difficult to determine with precision the actual local taxing jurisdiction into which a purchased commodity is to be delivered.
The present inventors have observed that the jurisdictional boundaries of most local governments can be ascertained with reasonable certainty simply by using commercially available mapping software (usually approved by the United States Postal Service, USPS) that applies the tax rate based on ZIP and ZIP+4 delivery address codes. “ZIP” is an acronym for Zone Improvement Plan.
Indeed, ZIP and ZIP+4 codes can be used to determine the proper taxing jurisdiction for a commodities sales transaction with an accuracy rate of approximately 89%. Although this level of precision may seem acceptable, the fiscal impact of its shortcomings is a concern for many smaller local governments. It is not uncommon for different local tax rates to apply within the same ZIP code. For example, a commercial address on one side of a busy street in a large city such as Denver, Colo. may be taxed at one rate, while a commercial address on the same street may be taxed at a different rate yet both reside in the same ZIP+4 area code. Under these circumstances, the appropriate local taxing authority bears the considerable administrative burden of determining whether the correct taxes are being assessed as well as collecting those taxes.
The deficiencies of existing sales tax systems are easily observed when two or more taxing jurisdictions fall into a single ZIP code and ZIP+4 code. In those situations, an affected business cannot be certain whether it is assessing the proper local sales taxes at the point of sale (or point of commodities delivery). This poses a dilemma for retailers with a physical presence in the state of delivery since they are liable for any mistakes made in applying the incorrect tax.
An advantage exists, therefore, for an adaptive system including a master database in which accurate tax assessment information from unlimited taxing jurisdictions may be stored, continuously updated and easily matched with virtually any online or conventional point of sale product or service offered for sale by any wholesaler or retailer that is a participant in or client of the system. A further advantage exists for such a system wherein the system employs presently existing or hereinafter developed technologies or systems for uniformly coding commodities as the bases for identifying, monitoring and modifying tax status information relating to product and/or services listings in the master database and client databases. As used herein, the term “commodities” shall be construed to cover both goods and services. For example, a presently available and widely used uniform commodities coding means suitable for the purposes of the present invention is barcode technology such as the Universal Product Code (UPC). A particular advantage of using a uniform coding means as a commodity identifier is that it minimizes the possibility of errors in matching the commodity to its tax status in any taxing jurisdiction. That is, each commodity code is uniquely associated with a particular product or service, and the same code is used on or in connection with the particular product or service regardless of the taxing jurisdiction in which the product or service is transacted or delivered.
An adaptive system founded on a master database which links uniform commodities coding means (e.g., barcode technology such as UPC) to unlimited taxing jurisdictions thus enables all wholesalers and retailers that interact with the system to contribute to and share in the development of the content of the master database. Since some merchants may sell some coded goods and/or services that another may not, each merchant contributes to the collective compilation of the master database.
In addition, jurisdictional tax information is centrally compiled by the system and not the participants. As such, the participants are not hampered by having to continually employ, contract with or otherwise retain tax specialists to monitor changes in tax law in potentially large numbers of taxing jurisdictions. In addition to the obvious benefits of reduced cost and increased speed and reliability, the ability of merchant participants to access the shared information permits a participant to obtain product and/or service point of sale tax assessment information not only in taxing jurisdictions in which it presently does business but also in taxing jurisdictions in which it may wish to do business in the future.
Additionally, in order for a merchant to be obligated to collect and remit sales tax, the retailer has heretofore been required to have a physical presence in or substantial nexus with the state where a commodity sold by the retailer is delivered (the absence of which physical presence has thus far essentially insulated Internet sales transactions from sales tax liability). The existence of a comprehensive and independently-administered centralized sales tax database eliminates the need for a retailer to have a physical presence in the state where the commodity is delivered, and thereby enables taxation of Internet sales without imposing a burden upon web retailers.
A further advantage exists for a system for accepting online sales tax exemption certificates, for providing real-time reports to state and local taxing jurisdictions and retailers, and for providing a back office system that remits the correct sales tax to the proper taxing authority.
A further advantage exists for a system which uses a combination of conventional mapping methods and supplemental information to provide geographically precise and timely information regarding the boundaries of virtually any taxing jurisdiction.